Where Does Obama Get His R&D Stats?

Speaking to the Business Roundtable on February 24, Obama said:

To spur the discovery of services and products and industries we have yet to imagine, we’re devoting more than 3 percent of our GDP to research and development -– an amount that exceeds the level achieved at the height of the space race

 Who the heck is feeding the President his numbers? If anything, when the data for  2009 and 2010 national R&D finally come out, these figures  may turn out to be the worst in years.

The last published number on national R&D spending from NSF puts government, business, and academic spending on R&D at roughly 2.8% of GDP, less than the 2.9% in 1964.  

We know that government spending on R&D went up between 2008 and 2010, but the gain was less than a tenth of a percentage point of GDP. 

The real problem is that corporate and academic spending on U.S. R&D is almost certainly falling.  How fast? We don’t know.  But the combination of pharma mergers, auto company cutbacks, and the movement of  R&D facilities overseas suggests a sharp cutback in U.S. R&D spending.

In fact, the number of engineers and scientists employed in the U.S. contracted by 5.0%  in 2009, a much bigger decline than the 3.8% drop for the U.S. workforce as a whole.

Obama was sounding complacent, when he should have been sounding the alarm.

Invest in America Alliance

Well, some signs of life on the private innovation front. From Ars Technica:

Intel has announced a $3.5 billion plan to boost US job growth and innovation by investing alongside 24 of the country’s top venture capital firms in industries like bioinformatics, clean technology, and IT.

The article went on to say:

I’ve talked to more than one semiconductor startup who has corroborated what I’ve observed from reporting on the tech industry’s response to the financial crisis: R&D has been a major casualty of the downturn, as companies across the industry have axed programs and cut jobs in an effort to boost profits on little income. (Intel is the notable exception here; the chipmaker has continued to invest in R&D throughout the recession.) It’s also the case that startups have had a hard time raising money in this environment. These two factors have combined to sow the seeds of a technology innovation drought that will hit in the next two years, as the products come to market and the innovation pipeline empties out without being refilled.

The innovation drought is already here, folks.

Why isn’t the Innovation Economy creating more jobs? Part I

Short answer: Because there isn’t enough innovation. Here’s what business and government can do about this.

2.8 million

That’s how many new jobs America’s most technologically-advanced industries were supposed to create between 1998 and 2008.  Such ‘leading-edge’ industries as aerospace, telecom, pharmaceuticals, and semiconductor and electronic component manufacturing were all going to add workers over the next ten years or so, according to November 1999 projections by the Bureau of Labor Statistics (see the full list below).  Indeed, by my calculations, the 1999 BLS projections implied that employment in leading-edge industries would grow at a 3.4% annual clip, more than twice as fast as the rest of the private sector.

 At the time, this forecast made perfect sense. Riding the New Economy boom, the U.S. had become the innovative icon for the rest of the world, the country that knew how to do it right. The global division of labor was clear:  The U.S. would focus on breakthrough innovations and creating advanced goods and services, which would in turn create high-paying jobs. Meanwhile, production and routine innovation would be shifted to low-wage countries.

 To put it in another way: Innovation was supposed to drive job growth in the U.S. And why not? From railroads to electricity to automobiles to radio to airplanes to computers, breakthrough innovations have created entire new industries.

But that’s not what happened over the past ten years.  Instead of growing, the leading-edge industries actually lost 68,000 jobs from 1998 to 2008 (see below). 

In fact, since the tech bust, the leading-edge industries have never recovered.

This astonishing fact is our prime clue to the nature of the current jobs crisis.  Innovation makes up the main comparative advantage for the U.S., since we can’t compete on cost with lower-wage countries (at least not yet). If we are not generating jobs in the innovative industries, it’s no surprise that the jobs situation is going to be tough. 

Why is this happening?  Generally economists advance two explanations for weak job growth in these kinds of high-end industries.  The optimistic explanation is that strong productivity growth enables companies to do more with fewer workers. The pessimistic explanation is that competition with other countries, perhaps unfair,  is hollowing out our innovative industries.

I’m going to come back to these two explanations in my next post.  For now, let me  advance a disturbing hypothesis. I suggest that outside of a few high-profile exceptions,  a wide range of potential breakthrough innovations have fallen short of promise since 1998. That has produced many fewer jobs in the U.S., and diluted America’s comparative advantage abroad.

One important example: Scientific advances in biotech were supposed to usher in a new era of drug discovery. Instead,  many illnesses turned out to be more complicated than expected. Pharmaceutical companies have struggled with a diminished drug pipeline, rather than an expanded one. As a result, this past decade has been one of repeated drug company mergers and layoffs, so that pharma and biotech together created less than 80,000 U.S. jobs over the ten years from 1998-2008, or less than 8,000 jobs per year.

In addition, the lack of profitable results from expensive U.S.-based research and development has made it easier for companies to move big chunks of their R&D operations to China, India, and elsewhere. 

I explored this hypothesis in two of the cover stories I wrote while I was still at BusinessWeek, Innovation Interrupted and The GDP Mirage. 

If you are willing to accept the idea of an innovation shortfall,  then it changes the way we should deal with the jobs crisis. Some form of short-term jobs stimulus is obviously necessary, though I will leave Congress and the Obama Administration to debate the exact form. The one thing to say, though, is that the $15 billion Reid bill–which focuses on tax breaks for hiring unemployed workers and more money for infrastructure–will lead to more hiring in the short-run, but won’t do anything to stimulate innovation jobs over the medium run.

Addressing the innovation shortfall has to be a cooperative project between business and government. How?

*Elevate innovation to the top of the policy agenda. The first step is for President Obama and the rest of the administration to publicly give higher priority to innovation. Right now Obama ritualistically mention innovation once in a speech, and quickly goes on to other topics. In the latest Economic Report of the President,  innovation is relegated to the very end of the report, and in fact does not get a whole chapter to itself: The chapter is called “Fostering Productivity Growth through Innovation and Trade.”

Why is this important? Government is much better at stopping innovation than creating it.  Breakthrough products and services are a problem for government agencies, because they fall outside the status quo.  That’s why  even well-intentioned bureaucrats have to be given a signal from the top that innovation is important.  This is something that can be done right now, without additional funding.

*Broaden out government funding for R&D beyond healthcare. In recent years, federal funding for R&D has increasingly focused on healthcare,  and Obama’s latest budget continues that trend, as I showed in these two posts, here and here.  That can’t continue. By becoming increasingly focused on healthcare research, the U.S. is falling behind in other areas.

*Improve measurement of the innovative sectors of the economy  As management consultants often say, you get what you measure.  Right now our  system of economic statistics is still based on the structure set up in the 1930s.  So, for example, we have virtually no real time information on business spending on R&D in the U.S. during the downturn–a key piece of information for understanding where the economy is going. The good news is that some progress has been made in this direction.  However, a relatively small amount of money could accelerate the upgrading of the statistics.     

To come: This is the first in three posts on innovation and jobs.  In my next post, I will address productivity and trade as alternative explanations for the employment weakness in leading-edge industries. And then in my third post, I will talk about the state of innovation in the U.S. today, and whether it makes sense to talk about U.S. innovation  distinct from the rest of the world.

Is the U.S. Overweight on Health R&D?

Let me continue my previous post on the R&D priorities of the U.S.government.

When it comes to government spending on health R&D, the U.S. just blows away the rest of the world (those are the blue bars. The data is from 2008 for all the countries, except for 2006 for Korea and 2005 for the UK).

But surprisingly, when it comes to government spending on nonhealth civilian R&D, the U.S. is actually lagging other major countries.  It appears that to some degree,  we have gambled our economy on the success of life sciences innovation.

Note: This data comes from the OECD, so it’s slightly different than the U.S.  budget data from the earlier post.

A Short Note on Child Safety

We spend a lot of time and money protecting our kids from accidents–everything from car seats to picking them up by car from a friend’s hose, rather than letting them walk home alone.  Does all this monitoring and spending work?

So here’s a question for you: The accidental death rate for kids 5-14 today is about 5.4 deaths per 100,000. In 1965, the accidental death rate for this age group was:

a) about the same as today’s death rate.
b) 11, or double today’s death rate
c) 15, or triple today’s death rate.
d) 19, or more than triple today’s death rate.

And let’s do a related question. The accidental death rate for kids 1-4 is 9.5 per 100,000. In 1965 the death rate for this age group was:

a) about the same as today’s death rate
b) 19, or about double today’s rate
c) 29, or about triple today’s rate
d) 33, or more than triple’s today’s rate

Health R&D still getting top priority

A quick look through Obama’s proposed 2011 budget shows that nondefense health R&D is still getting top priority over nondefense nonhealth R&D–that is, pretty much everything else.  Take a look at this chart:

The Obama budget continues the trend of the Bush years–a rising share of GDP going for health R&D,  while federal nonhealth nondefense R&D is basically flat as a share of GDP.   Nonhealth R&D includes space,  energy, environment,  information technology, physics, chemistry, and pretty much the whole range of science and technologies, outside of the life sciences.

Since FY 2001, funding for health R&D has exceeded funding for nonhealth nondefense R&D, and the gap has been growing.   The President’s proposed budget for 2011 calls for nondefense health R&D to exceed nondefense nonhealth R&D by 31%.

Given that the Obama Administration has made green technologies a priority, it’s worth looking at federal funding for potentially ‘green’ R&D:  Transportation, energy, natural resources, and environment. 

This chart shows federal nondefense R&D spending in these key areas, as a share of GDP. Certainly it’s on an uptick compared to the 2006-2008 lows.  But even then, the 2011 level of funding for  transportation/energy/environment R&D, measured as a share of GDP,  is roughly half where it was in 1992.  

If you believe that the U.S. is falling behind in nonhealth science and technology,  these charts suggest one reason why.

Robot-assisted Surgery: An Example of Growth Ambiguity

As everyone who reads this blog knows, I worry a lot about whether innovation is proceeding as fast as people think it is. That’s especially true in healthcare, where years of apparent advances have not cut death rates for middle-aged Americans.

But some innovations are just tough to assess.  Back in the late 1990s,  a new medical technology was introduced with enormous fanfare: Robot-assisted surgery. The idea was that it was possible to partially automate surgery and drive down healthcare costs, just like manufacturing automation had driven down the cost of producing goods.  In addition, robot-assisted surgery promised to have better outcomes.

The technology took some time to get traction, and then gained ground quickly.  The best way is to track the stock price of the market leader, Intuitive Surgical. The company went public in June 2000. At the end of 2000, the share price was $17. At the end of 2003, the share price was  $16.97.  Then it went shooting up (see stock chart here). Now the latest quote is an astounding $332.

But just this weekend a story  appeared in the NYT about robot-assisted surgery. The story,  entitled “Results Unproven, Robotic Surgery Wins Converts“,  points out that the technology has been very successful commercially.

Last year, 73,000 American men — 86 percent of the 85,000 who had prostate cancer surgery — had robot-assisted operations, according to the robot’s maker, Intuitive Surgical, the only official source of such data. Eight years ago there were fewer than 5,000, Intuitive says.

Here’s the key sentence:

But robot-assisted prostate surgery costs more — about $1,500 to $2,000 more per patient. And it is not clear whether its outcomes are better, worse or the same.

The article then goes on to say that:

Medical researchers say the robot situation is emblematic of a more general issue. New technology has sometimes led to big advances, which can justify extra costs. But often, technology spreads long before investigators know whether it is worthwhile.

As a ’skeptical technological optimist’, the case of robot-assisted surgery is utterly perplexing for me. It’s exactly the sort of technology that should pay off big, either in cost or in health outcomes or both. But then I would expect the  gains to be big enough to see. Or, is it just too soon?

I think I’ll give the folks at Intuitive a call.

Conundrum revisited: Why are gov’t interest rates so low?

Back in 2005, Alan Greenspan complained of a ‘conundrum’: The fact that long-term interest rates were refusing to rise, despite a sharp increase in short-term rates.  At the time, there were all sorts of explanations given. In retrospect, this puzzling behavior of the financial market was a sign of deep problems.

Right now, we are facing the conundrum, part II.  The  news is  dominated by the massive gov’t budget deficits, which stretch as far as the eye can see.  But despite the incredibly large  borrowing needs, Washington is actually raising money at lower rates than it did in 1999 and 2000, when the federal government was running a surplus.  Here are the two relevant charts. First, the interest rate on 10-year Treasury bonds.

And here’s the change in the federal budget balance, as a 12-month sum.  We can see how small surpluses turned into stunning deficits.

These are the sort of charts which are frustrating to deficit hawks and professors who have to teach macroeconomics. There seems to be no easy and straightforward link between budget deficits and interest rates

So let’s go looking for other reasons. First, inflation is about at the same level as it was in 1999 (the consumer inflation rate in the year ended December 1999 was 2.7%, compared to 2.8% in the year ending December 2009).  Second,  net exports as a share of GDP are roughly about the same level as they were in 1999 and 2000, suggesting that the U.S. has about the same need to borrow from overseas.

Is it possible that the federal government is getting such a good rate because the rest of the economy is not borrowing?  Here’s a chart of borrowing by all nonfinancial sectors–consumers, nonfinancial business, state and local governments, and the fed. Measured as a share of GDP,  borrowing is still roughly where it was back in 1999 and 2000. (I’ve given both the quarterly and the smoothed charts).  

So what the heck is going on here? It could be that the U.S. government still counts as the only safe investment out there, even with the big budget deficits.  Possible, but that depends on highly myopic investors.  It could be that the demand for funds globally is low. Or it could be that the bond market is trying to tell us that long-term expectations for growth are low.

It’s a conundrum.

Iceland and Lehman

The new book excerpt from  Hank Paulson points out that  the Lehman bailout deal fell apart at the last minute because of British government intransigence:

At 11 a.m., I went back upstairs, and soon got on the phone with (British Finance Minister) Alistair Darling, who wanted a report on Lehman. I told him we were stunned to learn that the FSA was refusing to approve the Barclays’ transaction

He made it clear, without a hint of apology in his voice, that there was no way Barclays would buy Lehman. He offered no specifics, other than to say that we were asking the British government to take on too big a risk, and he was not willing to have us unload our problems on the British taxpayer.

And who is Darling? The same smart guy who also used antiterrorist laws against Iceland when its banks collapsed.

Oct. 9 (Bloomberg) — Chancellor of the Exchequer Alistair Darling used anti-terrorism rules to take control of assets held in Britain by a troubled Icelandic bank.

Darling stepped in to protect deposits made by U.K. residents in Reykjavik-based Landsbanki Islands hf, which the government of Iceland seized yesterday. About 300,000 U.K. account holders held deposits at Landsbanki’s Internet bank, Icesave.

“To protect U.K. economic interests the government has frozen the funds and financial assets held by Landbanksi,” Stephen Timms, financial secretary to the Treasury, said in Parliament in London today

So basically, this crisis blew up because the British government was in self-preservation mode. This is not just a historical footnote….it suggests, as we already knew, that the fundamental weakness of the global economy is that there is no global central bank and no global regulators with real power.

D**n, Consumer Spending is Not Economic Activity

This morning the BEA released the December  report on personal income and outlays. This is what appeared on Reuters:

Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of U.S. economic activity, to rise 0.3 percent last month.

(my emphasis added).

No, no, no.  In a global economy, U.S. consumer spending does not necessarily translate into U.S. economic activity. If people are buying more imported television, cars, and clothing, you can get plenty of gains in U.S. consumer spending without corresponding gains in U.S. jobs.

This confusion between consumer spending and economic activity is not a harmless mistake. It goes right to the heart of the trade deficit, the budget deficit, and our inability to generate jobs.

Please note: I don’t mean to pick on Reuters.  But this is getting ridiculous.